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We all have
different roles and responsibilities, depending upon the stage of life we are
at. Due to this, the requirements of one individual differs from that of the
other. A bachelor’s needs and responsibilities would be very different from
that of a person with a family. Thus the assets in which a bachelor should
invest his funds should be very different from the assets in which a person
with family invests. Investing funds in different assets according to the needs
and risk taking abilities of individuals, in appropriate proportions, and
managing this concoction over time, is known as Asset Allocation.

Different
assets in which investors invest their money include bonds, stocks, shares,
bank deposits, mutual funds, real estate, gold etc. A good asset allocation is
one in which the wealth of an individual is properly distributed across
different financial instruments in a way that helps the individual achieve his
objectives. In the event of negative performance by one of the assets, others
cover up for the loss. Asset allocation diversifies the risk in an organized
and planned manner.

Assets are
selected based on the goals of the individual. The goals could be short term or
long term, lump sum requirement of money or equal amounts spread over many
year. The time available to achieve the financial goals is also important in
determining the asset class mix. And of course the risk appetite and ability.

The risk appetite of investors
are grouped under three categories; aggressive, moderate and conservative.
Aggressive investors look for investing in asset classes which are very risky,
like equities, hedge funds and certain commodities. Conservative investors
prefer to stick to asset classes like debt mutual funds, fixed deposits, small
saving schemes, public provident fund etc. which have very low or no risk
attached to them. People with moderate risk appetites like to take measured
risks. Mutual Funds may be a suitable asset class for them.

Risk taking abilities differ from
risk appetites and is not generally understood by investors. A person may have
the appetite to take very high risk but may not have the ability to do so. For
example, a person may be a risk lover, but may have many mouths to feed and
less money to spare. Hence his ability to take risk is very low, which must be
accounted for when allocating assets.

It is commonly seen that
investors make investments without analyzing their needs and requirements and
end up with wrong choices. They either follow the trends in the market, or
suggestions given by friends and family or simply imitate someone else. Young
investors mostly buy assets on equated monthly installments and equate it to
forced saving. They do not realize that buying assets which depreciate is not
saving or investing. Retired investors prefer to invest money in mostly safe
and riskless assets.

According to Hemant Rustagi, CEO,
Wiseinvest, a wealth management firm, the mistake committed by investors is
that they identify the instruments even before they decide on asset allocation.
Investors do not choose instruments as per their needs but according to their
awareness or suggestions which are given to them. This leads to misallocation
of assets as the objective of asset allocation is not considered. Thus, the
most important thing to begin with is to understand the requirement and the
objective of asset allocation for an individual.

Over the years it has been seen
that Indians prefer to invest in Fixed Deposits and Gold irrespective of their
investment objectives. The investment in risky assets like shares and mutual
funds are less than three-four percent of household savings. Even a necessary
asset class like Insurance receives less allocation than fixed deposits.

On the other
hand, investment in gold is highly preferred by individuals in India. This is because
Indians have sentiments attached to gold, it is liquid and it is considered to
be a hedge again inflation. The ever increasing demand for gold is another
reason for minimal interest in other asset classes.

It is time to
start investing for achieving specific financial goals. Be it education,
marriage or a house. Plan, allocate, manage, be disciplined and achieve.

Friday, August 30, 2013

This article was first published in India Abroad, August 30, 2013, pg.
21

http://www.indiaabroad-digital.com/indiaabroad/20130830?pg=21#pg21

Rupee depreciates to Rs65.56 per dollar before
recovering for the day. An average Indian would ask, "Why should I worry
about the exchange rate? I am neither going on a World tour, nor am I sending
my kids to study in America!".

Well, as the currency depreciates, the price rises
ensure that you need more and more of it to buy the same quantity of goods. The
purchasing power comes down due to inflation and pressure on the interest
rates. As in the case of India, due to the depreciating Rupee, the Reserve Bank
of India may not be able to decrease the interest rates, in spite of demand
from the industry to do so.

So a mango Indian says, "Okay. I got it. I
feel the pinch of the rising prices. I feel my car is a white elephant. Petrol
prices go up every month. I wish my company paid me salary in US Dollars".

Now that is the best scenario. Earn in US Dollars
and spend in Indian Rupees. The exporters and the manufacturers who have their
facilities in India, that is their expenses are in Rupees, but export their
goods and services, that is earnings are in Dollars, fall in this category. As
do the Non-Resident Indians (NRIs).

According to the World Bank, the Indians form one
of the largest immigrant population in the world (next only to China), around 1
percent of the total population of India. The estimated total remittance of
money by NRIs, from more than 190 countries, in the year 2012 is a daunting
figure of $69billion, higher than that of China, as per data from the world
bank. It is approximately 3 percent of our GDP and 75 percent of our Current
Account Deficit (CAD).

It does not come as a surprise then that the
government is trying to woo the NRIs to repatriate more funds into the country
to support the burgeoning CAD and the falling Rupee. The government has deregulated
the interest rate on non-residence external (NRE) and Foreign Currency Non Residential (FCNR)
Account deposits to incentivize the NRIs to park their funds in India.

Taking cue from this, many banks have increased the
interest rates that they offer on these accounts. For example, IDBI bank
increased the interest rates to 9.5 percent (by up to 50 basis points) for long
term deposits in NRE accounts. It also
increased the interest rates by 100 basis points for the FCNR accounts.

As a result,
the repatriation of funds from NRIs based in US, UK, Singapore, Dubai have
increased in the last month. It clearly makes good investment sense for the
NRIs as the interest rates offered by banks in countries like US, UK, Singapore
and Dubai can range from a meager 0.5 percent to 2 percent at the most.

The falling rupee has also rekindled hopes of
owning a property in India for many NRIs who want to maintain a home in India
and would eventually like to come back to their own country. A survey conducted
by the Associated Chamber of Commerce and Industry of India (Assocham),
revealed an increase in the interest of the NRI community in real estate. The
real estate has become more affordable to them in Rupees terms. The property
prices as such are depressed in India due to high interest rates on home loan
and lack of demand internally due to the state of the economy.

It may also be a good time to invest in the equity
markets for those who can take the risk and tide over the uncertain times with
nerves of steel. Many stocks are at their 52 weeks low. Many others are selling
at very low P/Es and discounts to their book values.

Overall, as Simon Newcomb, a Canadian-American
astronomer and mathematician writes in his book, "The A B C of Finance",
published in 1877, "...a depreciating currency is the greatest source of
injury to the business of a nation, being nothing less than a national
calamity".

But, it is good news for those earning in
currencies against which Rupee is depreciating.

'Dear' to people, but not so
‘dear’ to Indian Government at the moment. Or rather, too ‘dear’ for Indian
government. The gold has kept the finance minister on his toes since the
beginning of this year as continuous measures to curb gold imports have failed
to reduce the ‘dearness’ of gold to people.

It is worthwhile to muse why the
shiny metal has had an inherent appeal and emotional connect with people since
ages.

How much gold is there?

Ever wonder how much gold is
there? Let us see. Imagine you have a living room that measures 65 feet in
length, breadth and height. Now imagine that it is full of gold. That is it.
That is all the gold above ground in the world.

However, if you were to convert
this block of gold into a wire of five micron thickness (thickness of human
hair is - 75 microns), you would be able to wrap planet earth 11.2 million
times. Now it seems a lot, doesn’t it? In other words, you can’t judge a book
by its cover. Besides its metallic
properties, there is much more to gold that makes it an obsession to mankind.

Who is after gold?

Kingdoms: Gold has been a
reason for wars between kingdoms throughout human history. In 1500s, King
Ferdinand of Spain destroyed Inca and Aztec civilisations while looking for
gold. While some civilisations were lost due to gold’s pursuit, America owes
its discovery to it for Christopher Columbus was in search of route to India
and China to find the source of China’s gold when he accidentaly found America
in 1492.

Individuals: In 1848, people from across the
world rushed to California in hope of securing gold flakes for themselves.
Later in 1888, discovery of a gold mine near Johannesburg in South Africa
triggered another gold rush.

Economies: Gold became vital part of
international financial system in 1870s when, to assert the importance of Gold,
all major countries linked their currencies to gold and adopted gold standards.

Central banks: Central banks in the world
turned net buyers of gold starting 2010. It serves as a guarantee that
governments will redeem their promises and secures the value of local currencies.

Investors: Negative correlation of gold
with stock market movements is its most appealing attribute for investors
helping them safeguard the investments from market movements. In addition,
investors use it as a store of value and inflation free investment.

Who else finds value in gold?

Sportspersons: Gold
became a prized possession of sportspersons since 1904 Olympic Games in
Missouri, US, that started the tradition of gold medals for winners of games.

Astrophysicists: Scientific value of gold was discovered
in 1961 when it was used in a spaceship as a protecting device against
radiation.

Pharmacists: In 1985, medical significance
of gold was discovered when SmithKline & French, a pharmaceutical company
in US, developed a gold-based drug for the treatment of rheumatoid arthritis.

Physicists: In 2001, Boston Scientific, a
leading medical innovation firm, invented a gold-plated stent used in heart
surgery to allow adequate flow of blood to heart.

Is gold the most valuable?

Platinum ($1,521 per troy ounce)
is a more precious metals than Gold ($1,417 per troy ounce)!

Yet, Peter Jackson chose to use
gold ring as ‘The Precious’ in Fiction Film Trilogy ‘Lord of the Rings’
grossing $2.92 billion which is roughly one third of India’s gold import in a
year. There is certainly more to gold than its monetary value.

The religious connect

Gold has a huge religious
significance, especially in India, a country with diverse religion and
cultures.

Hindus: In Puranas, ancient Hindu
texts, Hindu God Brahma is referred to as Hiranyagarbha which means born of
golden egg. In Hindu mythology, many goddesses have been described as
golden-hued that symbolizes purity and ultimate beauty. Manu, the ancient
law-giver to Hindu rishis recommended wearing golden ornaments on specific
occasions. Also, Indian mythological scripts describe how god and goddesses
rode golden chariots.

High current account deficit
means that a country is buying more from outside than it can afford to.

CAD, CAD, CAD … the most repeated
‘word’ in the financial world, today. India’s economy is in a mess – blame CAD;
inflation is spiraling out of control – blame CAD; rupee is sinking – again
blame CAD (recently a pink paper while discussing rupee woes, wrote, ‘the
undercurrent of an unsustainable and rigid CAD on rupee is a common
knowledge’).

So what is CAD, and why is it so
dangerous? Can the government control CAD? Read on to know all about current
account deficit.

What is Current Account Deficit

A current account simply is an
account of all money that comes into the country [as receipts for exports of
goods and services, investment income or as capital] and all money that goes
out of the country [as payments made for importing goods and services, paying
out income for investments made by foreign entities in the form of interest or
dividend, or outflow of capital from the country]. When the outflows are more
than the inflows, a deficit occurs in the current account of the nation, which
is widely known as the Current Account Deficit (CAD).

The CAD of Indiawas US$ 87.8 billion during Financial Year
2012-13. How was this figure arrived at?

The composition of CAD

India exported goods worth $306.6
billion during the financial year. The exported goods included textiles, gems
and jewellery, mineral fuels, etc. On the other hand, it imported goods worth
$502.2 billion, half of it on account of gold and fuel. This is the reason
there is so much stress on reducing the oil and gold import bills by the
Reserve Bank of India and the Ministry of Finance.

The falling rupee is not helping
matters as it makes the import of fuel and gold more expensive in Rupee terms.

India also exported services
worth $145.7 billion and imported services to the tune of $80.8 billion during
the financial year. There was a net surplus. The surplus can be increased by
increasing exports further or by decreasing the import of services further.

The falling exchange rates might
help the exporters increase their market share by offering discounts. When the
rupee falls, the exporters get more Rupees for every dollar. Hence their
revenues in Rupees goes up. Similarly, import of services become more
expensive.

Inflows due to other forms of
income like transfer of money by Non-Resident Indians and investment income
received, amounted to $78 billion while the outflows amounted to $35 billion.

High CAD means that a country is
buying more from outside than it can afford to. The consequence of this may not
be felt too much in the short term. But in the long term, the domestic currency
can start to lose value as payments in dollars far exceed the amount of dollars
that the country receives. The demand for dollar goes up, making its value
appreciate, which in other words means that the domestic currency loses value.
This is what we are experiencing in India right now.

If the domestic currency loses
value, the foreign investors lose interest in the economy of the country as the
returns may not be adequate to them when they convert back the Rupees to
Dollars. For example, if an investor invests $100 in India when the exchange
rate is Rs50 per dollar, he buys assets worth Rs5,000 in India. After one year,
the value of the asset is Rs6,000. The appreciation in value is 20 percent.

The investor wants to sell off
the asset and take back his money to the US. So he sells his assets and gets
Rs6,000. When he goes to convert the Rupees back to US dollars, the exchange
rate being quoted by the bank is Rs62 per dollar. So the investor get $96.8 in
exchange for Rs6,000. The investor has actually lost money. He has lost 3.2
percent on his initial investment of $100.

This explains why, in the long
term, investors would shy away from a country with depreciating currency, which
is one of the consequences of a high CAD.

Measures to control CAD

In order to control the CAD, the
government would put in place various restrictions on the import of
non-essential goods to start with. As in the case of India, the finance
minister Mr. P. Chidambaram recently announced a curb on the import of Gold
coins and medallions. Other measures like making it easier for foreigners to
invest in India, making it easier for companies to raise money outside India
(this brings in foreign exchange, though interest needs to be paid on it) were
also announced by the finance minister.

If these steps do not reduce the
CAD, further measures could be more restricting or severe in nature.